I present and critique pay-per-click ads that don't deliver what they promise. I consider implications for search engine revenues, and I analyze legal and ethical duties of advertisers and search engines. I offer a system for others to report similar ads that they find.

As it turns out, lots of pay-per-click advertisers push and exceed the limits of ethical and legal advertising -- like selling products that are actually free, or promising their services are "completely free" when they actually carry substantial recurring charges.

One scam Google doesn't prohibit -- and as best I can tell, does nothing to stop -- is charging for software that's actually free. Search for "Skype" and you'll find half a dozen advertisers offering to sell eBay's free telephone software. Search for "Kazaa" or "Grokster" and those products are sold too. Even Firefox has beentargeted.

Each and every one of these ads includes the claim that the specified product is "free." (These claims are expressed in ad titles, bodies, and/or display URLs). However, to the best of my knowledge, that claim is false, as applied to each and every ad shown above: The specified products are available from the specified sites only if the user pays a subscription fee.

These ads are particularly galling because, in each example, the specified program is available for free elsewhere on the web, e.g. directly from its developer's web site. Since these products are free elsewhere, yet cost money at these sites (despite promises to the contrary), these sites offer users a particularly poor value.

Often these sites claim to offer tech support, but that's also a ruse: Tests confirm there's no real support.

Although sophisticated users will realize that these sites are bad deals, novice or hurried users may not. These sites bid for top search engine placement -- often appearing above search engines' organic (main) results. Some proportion of users see these prominent ads, click through, and get tricked into paying for these otherwise-free programs. Claiming a refund takes longer than it's worth to most users. So as a practical matter, a site need only trick each user for an instant in order to receive its fee.

The "completely free" ringtones that aren't

Ringtone ads often claim to be "free," "totally free," "all free," "100% complimentary," and available with "no credit card" and "no obligation" required. These claims typically appear in pay-per-click ad bodies, but they also often appear in ad titles and even in ad domain names, of course along with landing pages.

Often, these claims are simply false: An ad does not offer a "totally free" product if it touts a limited free trial followed by an auto-renewing paid service (a negative option plan).

Other claims are materially misleading. For example, claiming "no credit card required " suggests that no charges will accrue. But that too is false, since ringtone sites generally charge users through cell phone billing systems, unbeknown to many users who believe a service has no way to impose a charge if a user provides no credit card number.

Each and every one of these ads includes the claim that the specified product is "free" (or some other claim substantially similar, e.g. "complimentary"). In most cases, subsequent language attempts to disavow these "free" claims. But in each case, to the best of my knowledge, service is available only if a user enters into a paid relationship (e.g. a paid subscription) -- the very opposite of "free." (Indeed, the subscription requirement applies even to unlimitedringtones.com, despite that ad's claim that "no subscription [is] required." The site's fine print later asserts that by requesting a ringtone registration, a user "acknowledge[s] that [he is] subscribing to our service billed at $9.99 per month" -- specifically contrary to site's earlier "no subscription" promise.)

Vendors would likely defend their sites by claiming that (in general) their introductory offers are free, and by arguing that their fine print adequately discloses users' subsequent obligations. This is interesting reasoning, but it's ultimately unconvincing, thanks to clear regulatory duties to the contrary.

The FTC's Guide Concerning the Use of the Word 'Free' is exactly on point. The guide instructs advertisers to use the word "free" (and all words similar in meaning) with "extreme care" "to avoid any possibility that consumers will be misled or deceived." The guide sets out specific rules as to how and when the word "free" may be used, and it culminates with an incredible provision prohibiting fine print to disclaim what "free" promises. In particular, the rule's section (c) instructs:

"All the terms, conditions and obligations upon which receipt and retention of the 'Free' item are contingent should be set forth clearly and conspicuously at the outset of the offer ... in close conjunction with the offer of 'Free' merchandise or service." (emphasis added).

In case that instruction left any doubt, the FTC's rule continues:

"For example, disclosure of the terms of the offer set forth in a footnote of an advertisement to which reference is made by an asterisk or other symbol placed next to the offer, is not regarded as making disclosure at the outset."

Advertisers may not like this rule, but it's remarkably clear. Under the FTC's policy, ads simply cannot use a footnote or disclaimer to escape a "free" promise made earlier. Nor can an advertiser promise a "free" offer at an early stage (e.g. a search engine ad), only to impose additional conditions later (such as in a landing page, confirmation page, or other addendum). The initial confusion or deception is too strong to be cured by the subsequent revision.

Advertisers might claim that the prohibited "free" ads at issue come from their affiliates or other partners -- that they're not the advertisers' fault. But the FTC's Guide specifically speaks to the special duty of supervising business partners' promotion of "free" offers. In particular, section (d) requires:

"[I]f the supplier knows, or should know, that a 'Free'' offer he is promoting is not being passed on by a reseller, or otherwise is being used by a reseller as an instrumentality for deception, it is improper for the supplier to continue to offer the product as promoted to such reseller. He should take appropriate steps to bring an end to the deception, including the withdrawal of the 'Free' offer."

It therefore appears that the ads shown above systematically violate the FTC's "free" rules. Such ads fail to disclose the applicable conditions at the outset of the offer, as FTC rules require. And even where intermediaries have placed such ads, their involvement offers advertisers no valid defense.

Ads impersonating famous and well-known sites

Some pay-per-click ads affirmatively mislead users about who is advertising and what products are available. Consider the ads below, for site claiming to be (or to offer) Spybot. (Note text in their respective display URLs, shown in green type.) Despite the "Spybot" promise, these sites actually primarily offer other software, not Spybot. (Spybot-home.com includes one small link to Spybot, at the far bottom of its landing page. I could not find any link to the true Spybot site from within www-spybot.net.)

In addition, search engine ads often include listings for sites with names confusingly similar to the sites and products users request. For example, a user searching for "Spybot" often receives ads for SpyWareBot and SpyBoot -- entirely different companies with entirely different products. US courts tend to hold that competitive trademark targeting -- one company bidding on another company's marks -- is legal, in general. (French courts tend to disagree.) But to date, these cases have never considered the heightened confusion likely when a site goes beyond trademark-targeting and also copies or imitates another company's name. Representative examples follow. Notice that each ad purports to offer (and is triggered by searches for the name of) a well-known product -- but in fact these ads take users to competing vendors.

Google's responsibility - law, ethics, and incentives

Google would likely blame its advertisers for these dubious ads. But Google's other advertising policies demonstrate that Google has both the right and the ability to limit the ads shown on its site. Google certainly profits from the ads it is paid to show. Profits plus the right and ability to control yield exactly the requirements for vicarious liability in other areas of the law (e.g. copyright infringement). The FTC's special "free" rules indicate little tolerance for finger-pointing -- even specifically adding liability when "resellers" advertise a product improperly. These general rules provide an initial basis to seek greater efforts from Google.

Crucially, the Lanham Actspecifically contemplates injunctive relief against a publisher for distributing false advertising. 15 USC § 1125(a)(1) prohibits false or misleading descriptions of material product characteristics. § 1114 (2) offers injunctive relief (albeit without money damages) where a publisher establishes it is an "innocent infringer." If facing claims on such a theory, Google would surely attempt to invoke the "innocent infringer" doctrine -- but that attempt might well fail, given the scope of the problem, given Google's failure to stop even flagrant and longstanding violations, and given Google's failure even to block improper ads specifically brought to its attention. (See e.g. World Wrestling Federation v. Posters, Inc., 2000 WL 1409831, holding that a publisher is not an innocent infringer if it "recklessly disregard[s] a high probability" of infringing others' marks.)

Nonetheless, the Communications Decency Act's 47 USC § 230(c)(1) potentially offers Google a remarkable protection: CDA § 230 instructs that Google, as a provider of an interactive computer service, may not be treated as the publisher of content others provide through that service. Even if a printed publication would face liability for printing the same ads Google shows, CDA § 230 may let Google distribute such ads online with impunity. From my perspective, that would be an improper result -- bad policy in CDA § 230's overbroad grant of immunity. A 2000 DOJ study seems to share my view, specifically concluding that "substantive regulation ... should, as a rule, apply in the same way to conduct in the cyberworld as it does to conduct in the physical world." But in CDA § 230, Congress seems to have chosen a different approach.

That said, CDA § 230's reach is limited by its exception for intellectual property laws. § 230(e)(2) provides that intellectual property laws are not affected by § 230(c)(1)'s protection. False advertising prohibitions are codified within the Lanham Act (an intellectual property statute), offering a potential argument that CDA § 230 does not block false advertising claims. This argument is worth pursuing, and it might well prevail. But § 230 cases indicate repeated successes for defendants attempting to escape liability on a variety of fact patterns and legal theories. On balance, I cannot confidently predict the result of litigation attempting to hold Google responsible for the ads it shows. As a practical matter, it's unclear whether or when this question will be answered in court. Certainly no one has attempted such a suit to date.

Notwithstanding Google's possible legal defenses, I think Google ought to do more to make ads safe as a matter of ethics. Google created this mess -- by making it so easy for all companies, even scammers, to buy Internet advertising. So Google faces a special duty to help clean up the resulting problems. Google already takes steps to avoid sending users to web sites with security exploits, and Google already refuses ads in various substantive categories deemed off-limits. These scams are equally noxious -- directly taking users' money under false pretenses. And Google's relationship with these sites is particularly unsavory since Google directly and substantially profits from their practices, as detailed in the next section.

Even self-interest ought to push Google to do more here. Google may make an easy profit now by selling ads to scammers. But in the long run, rip-off ads discourage users from clicking on Google's sponsored links -- potentially undermining Google's primary revenue source.

Who really profits from rip-off ads?

When users suffer from scams like those described above, users' money goes to scammers, in the first instance. But each scammer must pay Google whenever a user clicks its ad. So Google profits from scammers' activities. If the scammers ceased operations -- voluntarily, or because Google cut off their traffic -- Google's short-run revenues would decrease.

Usersmoney service fees
Scammers money advertising fees
Google

How Google Profits from Scammers

Consider the business model of rogue web sites "selling" software like Skype. They have one source of revenue -- users buying these programs. Their expenses tend to be low: they provide no substantial customer service, and often they link to downloads hosted elsewhere to avoid even incurring bandwidth costs. It seems the main expense of such sites is advertising -- with pay-per-click ads from Google by all indications a primary component. The diagram at right shows the basic money trail: From users to scam advertisers to Google. When users are ripped off by scammers, at least some of the payment flows through to Google.

How much of users' payments goes to Google, rather than being retained by scammers? My academic economics research offers some insight. Recall that search engine ads are sold through a complicated multi-unit second-price auction: Each advertiser's payment is determined by the bid of the price of the advertiser below him. Many equilibria are possible, but my recent paper with Michael Ostrovsky and Michael Schwarz offers one outcome we think is reasonable -- an explicit formula for each advertiser's equilibrium bid as a function of its value (per click) and of others' bids. In subsequent simulations (article forthcoming), Schwarz and I will demonstrate the useful properties of this bidding rule -- that it dominates most other strategies under very general conditions. So there's good reason to think markets might actually end up in this equilibrium, or one close to it. If so, we need only know advertisers' valuations (which we can simulate from an appropriate distribution) to compute market outcomes (like advertiser profits and search engine revenues).

One clear result of my recent bidding simulations: When advertisers have similar valuations (as these advertisers do), they tend to "bid away" their surpluses. That is, they bid almost as much as a click is worth to them -- so they earn low profits, while search engines reap high revenues. When a user pays such an advertiser, it wouldn't be surprising if the majority of that advertiser's gross profit flowed through to Google.

A specific example helps clarify my result. Consider a user who pays $38 to Freedownloadhq.com for a "free" copy of Skype. But Freedownloadhq also received, say, 37 other clicks from 37 other users who left the site without making a purchase. Freedownloadhq therefore computes its valuation per click (its expected gross profit per incoming visitor) to be $1. The other 10 advertisers for "Skype" use a similar business model, yielding similar valuations. They bid against each other, rationally comparing the benefits off high traffic volume (if they bid high to get top placement at Google) against the resulting higher costs (hence lower profits). In equilibrium, simulations report, with 10 bidders and 20% standard deviation in valuations (relative to valuation levels), Google will get 71% of advertisers' expected gross profit. So of the user's $38, fully $27 flows to Google. Even if Freedownloadhq's business includes some marginal costs (e.g. credit card processing fees), Google will still get the same proportion of gross profit.

One need not believe my simulation results, and all the economic reasoning behind them, in order to credit the underlying result: That when an auctioneer sells to bidders with similar valuations, the bidders tend to bid close together -- giving the auctioneer high revenues, but leaving bidders with low profits. And the implications are striking: For every user who pays Freedownloadhq, much of the user's money actually goes to Google.

In January I estimated that Google and Yahoo make $2 million per year on ads for "screensavers" that ultimately give users spyware. Add in all the other terms with dubious ads -- all the ringtone ads, the for-free software downloads, ads making false statements of product origin, and various other scams -- and I wouldn't be surprised if the payments at issue total one to two orders of magnitude higher.

Towards a solution

Some of these practices have been improving. For example, six months ago almost all "ringtones" ads claimed to be "free," but today some ringtones ads omit such claims (even while other ads still include these false statements).

Recent changes in Google pricing rules seem to discourage some of the advertisers who place ads of the sort set out above. Google has increased its pricing to certain advertisers, based on Google's assessment of their "low quality user experience." But the specific details of Google's rules remain unknown. And plenty of scam ads -- including all those set out above -- have remained on Google's site well after the most recent round of rule changes. (All ads shown above were received on September 15, 2006, or later.)

Google already has systems in place to enforce its Adwords Content Policy. My core suggestion for Google: Expand that policy to prevent these scams -- for example, explicitly prohibiting ads that claim a product is "free" when it isn't, and explicitly prohibiting charging users for software that's actually free. Then monitor ads for words like "free" and "complimentary" that are particularly likely to be associated with violations. When a bad ad is found, disable it, and investigate other ads from that advertiser.

To track and present more dubious ads, I have developed a system whereby interested users can submit ads they consider misleading for the general reasons set out above. Submit an ad or view others' submissions.

These problems generally affect other search engines too -- Yahoo, MSN, and Ask.com, among others. But as the largest search engine, and as a self-proclaimed leader on ethics issues, I look to Google first and foremost for leadership and improvement.

Google's (Non-)Response

When Information Week requested a comment from Google as to the ads I reported, Google responded as follows:

"When we become aware of deceptive ads, we take them down. ...
We will review the ads referenced in this report, and remove them if they do not adhere to our guidelines."

A week later, these ads remain available. So Google must have concluded that these ads are not deceptive (or else Google would have "take[n] them down" as its first sentence promised). And Google must have concluded that these ads do adhere to applicable Google policies, or else Google would have "remove[d] them" (per its second sentence).

Google's inaction exactly confirms my allegation: That Google's ad policies are inadequate to protect users from outright scams, even when these scams are specifically brought to Google's attention.

All identifications and characterizations have been made to the best of my ability. Any errors or alleged errors may be brought to my attention by email.

I thank Rebecca Tushnet for helpful discussions on the legal duties of advertisers and search engines.